Special Securities Flashcards
Which of the following actions taken by a corporation will raise additional capital?
A. Declaration of a stock split
B. Announcement of a call of all convertible preferred shares at par
C. Declaration of a stock dividend
D. Announcement of a rights distribution allowing existing shareholders to buy the additional stock
The best answer is D.
The declaration of a stock split will not raise additional capital.
The call of a convertible security will either use the cash of the company if the security is handed in on the call notice; or will have no effect at all on the cash position of the company if the preferred stockholders convert to common stock.
Declaring a stock dividend increases the number of shares outstanding with no dollar change in total stockholders’ equity (as the market price of the shares will fall).
A rights distribution will raise additional capital, since the existing shareholders are asked to “subscribe” and therefore, pay, for more shares.
All of the following terms describe rights EXCEPT:
A. exercisable
B. negotiable
C. giftable
D. redeemable
The best answer is D.
Rights are not redeemable with the issuer.
The rights have a value based upon the lower subscription price available to the holder of the rights than the current market price.
The holder of the rights has a number of choices as to their disposition. The holder can sell them in the market at this value, since the rights are negotiable. The holder can exercise the rights, buying the stock at the subscription price. Finally, the holder can give the rights as a gift to someone else.
If a corporation wishes to sell additional shares, which of the following persons can subscribe using pre-emptive rights?
A. Common stockholders
B. Preferred stockholders
C. Convertible preferred stockholders
D. Bondholders
The best answer is A.
Only common stockholders have pre-emptive rights. Holders of senior securities (preferred stock and bonds) do not have pre-emptive rights; nor do warrant holders since they do not own the common stock unless the warrants are exercised.
A customer owns 210 shares of ABC common stock. ABC declares a rights offering, with the terms being that for every 20 rights tendered, a shareholder may purchase one additional share at $20 per share. Any fractional rights holding may be rounded up to buy an additional share. If this shareholder wishes to subscribe, which statement is TRUE?
A. The shareholder can buy a maximum of 10 shares by paying $20
B. The shareholder can buy a maximum of 11 shares by paying $220
C. The shareholder can buy a maximum of 11 shares by paying $420
D. The shareholder can buy a maximum of 110 shares by paying $2,200
The best answer is B.
The terms of the rights offering are that fractional holdings are rounded up to buy 1 additional share. This person owns 210 shares and thus, will receive 210 rights. 210 rights / 20 rights per share = 10.5 shares, which is rounded up to 11 shares @ $20 each = $220 necessary to subscribe.
A customer owns 256 shares of ABC common stock. ABC declares a rights offering, with the terms being that for every 15 rights tendered, a shareholder may purchase one additional share at $24 per share. Any fractional rights holding may be rounded up to buy an additional share. If this shareholder wishes to subscribe, which statement is TRUE?
A. The shareholder can buy a maximum of 15 shares by paying $360
B. The shareholder can buy a maximum of 16 shares by paying $384
C. The shareholder can buy a maximum of 17 shares by paying $408
D. The shareholder can buy a maximum of 18 shares by paying $432
The best answer is D.
The terms of the rights offering are that fractional holdings are rounded up to buy 1 additional share. This person owns 256 shares and thus, will receive 256 rights. 256 rights / 15 rights per share = 17.06 shares, which is rounded up to 18 shares @ $24 each = $432 necessary to subscribe.
ABC Corporation has declared a rights offering to stockholders of record on Tuesday, June 22nd. Under the offer, shareholders need 20 rights to subscribe to 1 new share at a price of $60. Fractional shares can be rounded up to purchase 1 full share. A customer owning 240 shares wishes to subscribe. The market price of the stock is currently $73. The customer can buy:
A. 12 shares for $720
B. 12 shares for $876
C. 240 shares for $14,400
D. 240 shares for $17,520
The best answer is A.
Since 20 rights are needed to buy 1 new share, the customer holding 240 shares, and therefore receiving 240 rights can buy 240 / 20 = 12 shares at $60 each = $720 total for 12 shares.
All of the following statements are true regarding warrants EXCEPT:
A. warrants allow the holder to buy the stock of that issuer at a fixed price
B. warrants give the holder a long term option to buy the stock
C. warrants are attractive to speculators because of the leverage that they offer
D. warrant holders have pre-emptive rights
The best answer is D.
Warrants are an equity-related security that give the holder the right to buy the stock of that issuer at a fixed price, typically with a 5-year life from issuance.
Warrant holders do not receive dividends, nor do they have other shareholder rights such as the right to vote or the pre-emptive right.
Warrants are much cheaper than the actual stock, because they only have value if the underlying stock rises. Thus, they give the holder greater leverage if the common stock does appreciate in value.
All of the following statements about warrants are true EXCEPT?
A. Warrants are issued to make corporate senior securities offerings more attractive to investors
B. Warrants typically give the holder a perpetual interest in the issuer’s underlying common stock
C. Warrants trade separately from the stock of the company
D. Warrants have a longer term than rights
The best answer is B.
Warrants are typically attached to debt and preferred stock offerings (these securities are “senior” to the common stock of the issuer) to make the securities more attractive to purchasers.
Warrants trade separately from the stock of the company. And lastly, warrants typically have a fixed life of 5 years or less and then expire (this is longer than the expiration of rights).
Perpetual means everlasting. Companies can issue perpetual warrants, but rarely do so.
Which of the following statements are TRUE regarding warrants?
A. Warrants give the holder the long term option to buy stock
B. Warrants give the holder a 2 month option to buy stock
C. The exercise price of a warrant is set at a premium to the stock’s current market price
D. The exercise price of a warrant is set at a discount to the stock’s current market price
The best answer is A.
Warrants give the holder the long term option to buy stock - they usually have a finite life of 5 years or so. At issuance, the exercise price of a warrant is set at a premium to the stock’s current market price, so that for the warrant to have value, the common stock price must rise.
On the other hand, rights have a very short life (e.g., 1 or 2 months) and the exercise price for rights is set at a discount to the stock’s current market price, allowing existing shareholders to subscribe at a favorable price.
All of the following statements are true regarding warrants EXCEPT:
A. Warrants generally have a maximum life of 2 months
B. At issuance, the exercise price of the warrant is set higher than the current market price of the underlying common stock
C. The price of the warrant will vary with the price movements of the underlying stock
D. The price of the warrant will vary depending upon the time to expiration of the warrant
The best answer is A.
Warrants generally have a life of 5 years - in contrast, rights have very short lives (e.g., 1 or 2 months).
At issuance, the exercise price of the warrant is set higher than the current market price of the underlying common stock. Thus, the warrant is issued at a price that is “out the money” and the market price of the stock must rise to at least this level for it to be worthwhile to exercise the warrant.
The price of the warrant will vary with the price movements of the underlying stock. As the stock’s price rises, the warrant becomes more valuable; as the stock’s price falls, the warrant becomes less valuable.
The price of the warrant will vary depending upon the time to expiration of the warrant. The greater the time to expiration, the greater the value of the warrant, since there is a greater probability that the price will rise in the remaining time to expiration.
Which statement is TRUE regarding warrants?
A. Warrants are typically issued with an exercise price that is higher than the stock’s current market price and would be exercised when the stock’s market price is below the warrant strike price
B. Warrants are typically issued with an exercise price that is higher than the stock’s current market price and would be exercised when the stock’s market price is above the warrant strike price
C. Warrants are typically issued with an exercise price that is lower than the stock’s current market price and would be exercised when the stock’s market price is below the warrant strike price
D. Warrants are typically issued with an exercise price that is lower than the stock’s current market price and would be exercised when the stock’s market price is above the warrant strike price
The best answer is B.
Warrants are typically attached to bond and stock offerings to make them more marketable. At issuance, the warrants are usually issued “out of the money” - meaning that the exercise price is higher than the stock’s current market price. In order for the warrants to have real value, the stock’s market price must rise above the warrant strike price. As the market value of the stock goes above the warrant strike price, the holder of the warrant can exercise, purchasing the stock below the current market value, for an immediate profit.
All of the following statements about warrants are true EXCEPT:
A. At issuance, warrants are “out of the money”
B. Warrant valuation is influenced by the life of the instrument
C. Warrant valuation is directly influenced by the valuation of the company’s common stock
D. Warrant valuation rises as the security approaches its maturity
The best answer is D.
Warrant prices will erode as the instrument nears maturity since the time value is constantly decaying. Warrant valuation is directly influenced by its life - the longer the warrant, the greater its value; the shorter the remaining life, the lower its value.
At issuance, warrants have exercise prices well above the current market price of the common stock, and therefore are “out of the money.” If the market value of the common rises, the warrant’s value will rise as well.
Finally, warrant valuation is influenced by market expectations for future corporate earnings, and hence the future price of the common stock.
Which of the following statements are TRUE regarding warrants?
A. The exercise price of a warrant is set at a premium to the stock’s current market price and the warrants are exercised when the exercise price is above the market price
B. The exercise price of a warrant is set at a discount to the stock’s current market price and the warrants are exercised when the exercise price is above the market price
C. The exercise price of a warrant is set at a premium to the stock’s current market price and the warrants are exercised when the exercise price is below the market price
D. The exercise price of a warrant is set at a discount to the stock’s current market price and the warrants are are exercised when the exercise price is below the market price
The best answer is A.
At issuance, the exercise price of a warrant is set at a premium to the stock’s current market price. The warrants will only be exercised when the market price rises above the strike price (why would you want to buy the stock at a price HIGHER than the current market?)
The exercise price of a warrant is set at issuance at:
A. a discount to the market price of the common stock
B. a premium to the market price of the common stock
C. the market price of the common stock
D. any price designated by the issuer
The best answer is B.
At issuance, the exercise price of a warrant is set at a premium to the stock’s current market price.
A corporation is offering a new issue consisting of 100,000 units at $200 each. Each unit consists of 1 share of preferred stock and a 1/4 warrant to buy one additional common share. A full warrant allows the purchase of an additional common share at $5. If all the warrants are exercised, the corporation will have:
A. 100,000 preferred shares and 25,000 common shares
B. 100,000 preferred shares and 50,000 common shares
C. 200,000 preferred shares and 100,000 common shares
D. 20,000 preferred shares and 200,000 common shares
The best answer is A.
Since each unit consists of 1 preferred issue, 100,000 units x 1 = 100,000 preferred shares. Since a warrant which enables one to buy 1/4 additional share is also attached to each unit, 100,000 units x 1/4 = 25,000 common shares issued if the warrants are exercised.
